End the Subsidies of Fossil Fuel

June 22 (Bloomberg) -- There may be little reason to hope
the Rio+20 meeting in Brazil this week will lead to major global
action against climate change. World leaders have skipped it.
The draft agreement the delegates from 190 countries have
written is rightly criticized as weak.

Yet it turns out that one specific climate challenge -- how
to eliminate subsidies for fossil fuels such as oil, gas and
coal -- is attracting extraordinary interest in Rio de Janeiro
and might at least inspire countries to take small but
significant steps toward reducing greenhouse-gas emissions.

These rising subsidies cost the world $409 billion in 2010,
according to the International Energy Agency. If no efforts are
made to curtail them, they could reach $660 billion by 2020, 0.7
percent of global gross domestic product.

What’s at least as bad is that the subsidies keep the price
of fossil fuels below market rates -- so low as to discourage
measures to improve energy efficiency. Getting rid of them could
lower total energy demand by 4.1 percent by 2020, the IEA
estimates.

Simply ending the subsidies would boost the price of power,
however, and leaders naturally want to avoid a popular pushback,
whether at the polls or in the streets, especially at a time of
financial hardship. That is not the only option.

Our corporate colleague Michael Liebreich, the chief
executive of Bloomberg New Energy Finance, has devised a way to
phase out fossil-fuel subsidies and, in the process, replace
them with financial support for energy-efficiency efforts and
renewable power. It’s a strategy that could work in countries
large and small -- without provoking backlash.

Here’s how it would work: A government would continue
providing its energy subsidies for three to 10 more years, but
transform them into credits. The recipients would be free to
spend these, at least in part, on renewable forms of energy.
Where credits could be directed to individual consumers, they
could be spent on improvements such as insulation, efficient
appliances and rooftop solar panels. Because the credits would
not favor one kind of power over another, many renewables would
be able, for the first time, to compete strongly against fossil
fuels.

Wind energy, for instance, could, on a level playing field,
cost as little as 6.5 cents per kilowatt-hour, BNEF estimates.
That is about the same as power from new coal plants and,
outside the U.S., cheaper than natural gas. Biomass, geothermal
and hydro power can also be competitive with coal. And although
solar power on a large scale remains relatively expensive,
rooftop systems can provide cheaper-than-retail power in many
markets. In the developing world, solar lanterns cost less to
operate than kerosene ones.

Governments could pay out these “sunset credits,” as
Liebreich calls them, in various ways. Where subsidies have been
provided to consumers, they could be replaced by rebates on
energy bills or by monthly or quarterly vouchers, redeemable
with retailers and installers of renewable power or equipment
that improves efficiency. If consumers are made aware that the
credits will eventually end, they will have the incentive to
invest in strategies that ultimately lower their household
energy bills.

Those retailers and installers who are paid with sunset
credits would in turn surrender them to a redeeming agent -- the
government, perhaps, or a bank or other lending institution --
to be reimbursed the market price for their products and
services.

Where subsidies are traditionally given to providers such
as electric utilities, those companies would receive the credits
and could either pass them along to their customers to spend on
efficiency, or invest them in renewable-energy generating
capacity or in their own efficiency measures.

In places where governments subsidize gasoline or diesel,
credits could be spent on transportation alternatives. Delivered
in the form of vouchers, debit cards or mobile-phone banking
credits, they could be spent on public transportation fares,
more fuel-efficient vehicles, even bicycles.

It’s easy to see, too, how sunset credits could attract
investment in renewable power and in technologies that increase
energy efficiency, as banks and other lenders provide upfront
capital in return for the promise of credits down the line. The
lenders could either redeem the credits or perhaps sell them to
pension funds, life-insurance companies and other long-term
asset holders, and a new credit market would be formed.

Setting up such a system would take effort and money, it’s
true. And it would certainly be complicated; mechanisms would be
needed to protect against fraud, for example. But such
investments are worthwhile if they enable governments to stop
spending public money to make fossil fuels unnaturally cheap.
The draft agreement for the Rio+20 meeting only vaguely commits
countries to phasing out the subsidies. Sunset credits offer a
way for them to make it happen.